FACT PATTERN 6: FEDERAL SECURITIES LAW- 10(b)(5) Flashcards
What are debt securities?
The investor lends capital to the corporation, to be repaid (usually with interest) as specified in the agreement
What is the debt holder’s relationship to the corporation?
She is a creditor, not an owner.
What is a debt that is secured by assets called?
A bond
What is an unsecured debt called?
A debenture
What is an equity security?
Investor buys stock from the corporation, which generates capital for the business.
What is the equity holder’s relationship to the corporation?
She is an owner not a creditor
This federal law prohibits fraud or misrepresentation (or nondisclosure) in connection with the purchase or sale of any security (debt or equity). What are the Elements?
What securities law does this fall under?
- At some point, the deal must use an “instrumentality of interstate commerce” (mail, telephone, or trade on a national exchange).
- A transaction (isrepresentation of material info, insider trading, Tipping)
- Materiality
- Scientor
- Reliance
This falls under rule 10(b)(5)
What is insider trading?
trading securities on the basis of material inside information.
Who is insider trading a problem for?
only a problem for someone high enough in the
business hierarchy that she has a duty to abstain or disclose
Who has the duty to abstain or disclose for insider trading?
Someone with relationship of trust an confidence with the SH, generally this means director, officers, controlling SH and employees of the issuer.
What is Tipping?
an insider passes along material inside information for a wrongful purpose.
What does the element of materiality in a 10(b)(5) rule mean?
The misrepresentation or omission must concern a “material” fact–one a reasonable investor would consider important in making an investment decision.
Who are the possible plaintiffs in a rule10(B)(5) claim?
- Securities and Exchange Commission (SEC).
2. Private action for damages by buyer or seller of securities
Widget Inc. issues a press release that Buffett has expressed an interest in acquiring a major block of its stock. The release fails to indicate that it
is Jimmy Buffett and not Warren Buffett who is interested. Because of this press release, Becky Katopolis does not sell her Widget stock. Does Becky have a 10b-5 claim?
No, she did not buy or sale. You need to be a buyer or seller.
Who are the possible defendant?
Any person, including entities
1. Company that issues a misleading press release.
2. Buyer or seller of securities who misrepresents material information.
3. Buyer or seller of securities who trades on material inside information (when there is a duty to disclose–again, comes from relationship of trust
and confidence with shareholders of the corporation).
4. Tipper or tippee.
L, an officer for X Co., learns that X Co. is planning to merge with Y Corp. She telephones her son-in-law Joe about this, and urges him to buy X Co. stock. Acting on the tip, Joe buys the stock. Any violations of rule 10b-5?
Do the analysis (say who is tipper tipee etc.
L is a tipper because: (1) she passed along material inside information in breach of a duty to X Co., and (2) she benefited by making a gift or enhancing her reputation
Joe is a tippee because he (1) traded on the tip and (2) knew or should have known that the information was improperly passed.
What is the liability test for a tipper?
(1) tipper passed along material inside information in breach of a duty to her corporation and (2) she benefited.
What is enough to be considered a benefit as a tipper under 10(b)(5)
Making a gift or enhancing your reputation is enough.
What is the liability test for a tipee?
Tipper
(1) traded on the tip and
(2) knew or should have known that the information was improperly passed.
D is a director of C Corp. While waiting for a concert to start, D tells her husband about a new, secret processing method that C Corp. has just developed. Bobbitt, who is sitting in the next row, overhears the conversation and buys C Corp. stock on a national exchange. Any violations of 10b-5?
NO. At worst, D was merely negligent, which is not enough for 10b-5 liability. So there is no tipper.
Bobbitt’s tip is ok, he can trade on the information
In 10B(5) if there is no tipper can there still be a tippee?
is not enough for 10b-5 liability. So there is no tipper. AND IN 10B-5, WHEN THERE IS NO TIPPER, THERE CANNOT BE A TIPPEE.
What is scienter?
D must have an intent to deceive, manipulate, or defraud. Recklessness may suffice
What can you put for the reliance element?
Said to be a separate element, as in fraud cases, but is presumed in public misrepresentation (e.g., a misleading press release) and nondisclosure
cases.
